Policy+Action With Dan Kim: Cutting Spending With Priority-Based Budgeting

Each year, federal, state and local government entities face the challenge of balancing their budgets. With the one-time infusion of COVID-19 pandemic funds now depleted, many are forced to consider cutting spending, even as their constituents have grown accustomed to certain levels of service. While the public demands fiscal responsibility, they don’t want to see services that benefit them eliminated.

How government chooses to make spending reductions is just as important as how it creates new programs. The time to cut budgets is also an opportunity to rethink what the government does, how it does it, and whether it’s working. While budget cuts are never easy, they can offer an opportunity for innovation and improved efficiency. The key is to move beyond across-the-board reductions and adopt a strategic approach that prioritizes what is most important and effective.

With more than 25 years of experience developing departmental budgets at the state and local levels, I’ve encountered various budget reduction methods. Here, I share different approaches I’ve experienced, including one that I believe is a better way to do more with the same or less.

TRADITIONAL BUDGETING APPROACHES

Below are a few approaches to budget reduction, each with their own strengths and weaknesses:

• Baseline Reductions: This method involves setting a reduction amount, which a department may apply on a pro-rata basis across programs or through a more targeted method. While simpler to implement, this conventional budget reduction strategy often protects the status quo. New programs or services are typically the first to be cut, regardless of their effectiveness, while entrenched programs continue, stifling innovation.
• Zero-Based Budgeting (ZBB): This approach requires each department to justify every expenditure from scratch. Each expense is reviewed to determine its necessity. While ZBB can help identify wasteful spending, the process is time-consuming and can be demoralizing, as it can feel like an interrogation. Moreover, ZBB often leads to a short-term focus that overlooks long-term strategic goals.
• Performance-Based Budgeting (PBB): This method links budget allocations to the achievement of predetermined performance goals. Departments must demonstrate the effectiveness of their programs and services in meeting those goals. PBB compels departments to prioritize activities and focus resources on those that deliver the most significant public benefit. However, it is often unrealistic to expect departments to have quantifiable outcomes or performance measures that align perfectly with their strategic priorities.

MY EXPERIENCE WITH PRIORITY-BASED BUDGETING

Each of the approaches listed above has its merits, but none truly stands out as the best option. Is there a better way? I think so.

When I served as chief deputy director of the California Department of Public Health (CDPH), the Jerry Brown administration “volunteered” me to pilot a zero-based budgeting process. The goal was to develop a ZBB methodology that could show departments how to leverage the budget process to improve efficiency and effectiveness.

Although I was not a fan of ZBB for the reasons previously mentioned, I didn’t have much choice. Fortunately, I was given the latitude to develop my version of ZBB, which was anything but traditional.

At CDPH, we piloted our version of the ZBB process with three different public health programs, each of which had requested additional resources for our upcoming budget. For each program, we formed a cross-cutting team and introduced them to our ZBB process. First, we provided background budget information, such as how we currently spend funds on different functions and activities, how many staff were allocated for these functions, and what contracts supported this work. Then, we asked team members to break into groups and identify what they would do if they received a 20 percent funding increase for their program. They had to specify what they would purchase, what staff they would add, and what positive outcome or benefit they expected.

Next, we asked each team to assume that their entire budget proposal was approved. However, for the following fiscal year, due to revenue shortfalls, their entire program budget would face a 50 percent reduction. Each team then had to identify what they would cut, how they would mitigate impacts, and why they would preserve what they kept. Finally, each team reported back to the group.

The outcomes of this exercise were transformative. To retain the innovative budget additions from the previous year, teams assessed all areas to identify redundant procedures and inefficiencies. Empowered by the exercise, they proposed policy, process and rule changes to streamline operations. By leveraging newfound authority, teams were able to expedite decision-making processes and eliminate bureaucratic hurdles that hindered efficiency.

Teams prioritized retaining innovative initiatives and enhancing preventive measures, recognizing their potential to improve efficiency and effectiveness. Instead of focusing solely on preserving existing programs, they embraced new budget proposals that included leveraging IT solutions to optimize operations. These proposals often involved investing in software and IT support staff to automate tasks, streamline processes and reduce workload burdens.

Surprisingly, this process not only led to reduced spending but also resulted in budget reallocations that better aligned with program priorities. Teams recognized the value of reallocating resources from less-effective programs toward initiatives with a higher potential for impact. By reallocating funds and staff within their programs, they optimized resource utilization without requiring additional legislative approvals.

At the end of our pilot project, each of the three teams received most of what they had proposed as budget enhancements without needing any legislative authority because they chose to reprioritize and reallocate their existing budgets. We achieved better rules, streamlined processes and improved outcomes with no additional costs.

EMBRACING PRIORITY-BASED BUDGETING

In a climate where fiscal constraints abound, adopting a priority-based budgeting approach can promote innovation, generate better outcomes and foster a collaborative environment built on trust. With priority-based budgeting, staff have the freedom to pursue “blue sky” ideas, provided they find ways to cut what isn’t working. By making this an ongoing, iterative process built into the budgeting framework, we can build continuous improvement within the organization in a systematic fashion.

Daniel C. Kim is director of procurement for the Weideman Group. His 25-plus years of experience in state and local government includes serving as director of California’s Department of General Services and a term as president of the National Association of State Chief Administrators.